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The Optimal Mix Between Funded and Unfunded Pension Systems When People Care About Relative Consumption
Author(s) -
KNELL MARKUS
Publication year - 2010
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.1468-0335.2009.00797.x
Subject(s) - pension , attractiveness , consumption (sociology) , economics , portfolio , position (finance) , actuarial science , microeconomics , finance , psychology , social science , sociology , psychoanalysis
The paper studies the optimal portfolio mix between funded and unfunded pension systems when people care about relative consumption. In pay‐as‐you‐go systems with fixed contribution rates, pensions are tied to wages. This lowers the uncertainty of individuals' future relative position thereby increasing the attractiveness of unfunded systems. The paper shows analytically that the optimal share of funding decreases with the importance of relative standing. A calibrated version of the model suggests that the concern for relative standing has also a quantitatively important impact on the optimal share of funding. For reasonable assumptions it is typically around 20%.